[postlink]https://forex-tech21th.blogspot.com/2010/03/online-fx-trading-3-critical-areas-of.html[/postlink]Back testing your trades is a critical component of the long term health of your system. However, if you're a Forex cowboy, no need to read any further. You're not into figuring out what went wrong last year, you just grab a super-duper new trading program and yell "Powder River, boys...let 'er buck!" Back testing isn't your game.
For you traders that really want to keep the process tuned up, back testing is a must. You can learn a lot from your performance ups and downs of previous years. Of course, the market dictates most of the activity, but your programming actions at crucial times could be the difference between a healthy account and a margin call.
Here's the best I can do for you on a definition of back testing. It's a method of simulation of your relevant past trading data in order to test it's effectiveness. Most technical strategies are static and unless they are re-programmed, will operate in the same manner going forward as they did in the past. Backtesting will show these tendencies and help you correct them. We all know that assuming that the same things that happened in the past will happen in the future, is a basis for trouble.
I believe that so much emphasis is placed on exotic theories that back testing is sometimes overlooked. Take some time to work on these back test areas, and you'll see a noticeable difference in your performance.
1) Entries and exits: This is probably the easiest area to back test. You can follow the previous market performance to see if you're jumping the gun or bailing out too early.
2) Leverage and cash management: Knowing when to use your margin to best advantage. It's easy to trace the times when you were over-leveraged at crucial opportunities and didn't have the cushion to make the most money. Your money model can be tested to see when you reach certain trigger points...and how your strategy worked.
3) Your trading psychology: This is sometimes the hardest pill to swallow. Back testing will show you your mental strengths and weaknesses. Do you let your emotions get out of hand? Are you too aggressive or too timid? Are you too easily influenced by what others think? As you back test, place a high priority on studying yourself, as well as your program.
When you back test your patterns, it's much easier to see areas of improvement that need to be undertaken. Without back testing, you're liable to develop a crisis of confidence in yourself and your system. When you start to lose confidence, you begin wholesale tinkering throughout your trading program. This is a bad mistake and will cause you to lose money. Back testing allows you to pinpoint areas of improvement, without throwing the baby out with the bathwater.
For you traders that really want to keep the process tuned up, back testing is a must. You can learn a lot from your performance ups and downs of previous years. Of course, the market dictates most of the activity, but your programming actions at crucial times could be the difference between a healthy account and a margin call.
Here's the best I can do for you on a definition of back testing. It's a method of simulation of your relevant past trading data in order to test it's effectiveness. Most technical strategies are static and unless they are re-programmed, will operate in the same manner going forward as they did in the past. Backtesting will show these tendencies and help you correct them. We all know that assuming that the same things that happened in the past will happen in the future, is a basis for trouble.
I believe that so much emphasis is placed on exotic theories that back testing is sometimes overlooked. Take some time to work on these back test areas, and you'll see a noticeable difference in your performance.
1) Entries and exits: This is probably the easiest area to back test. You can follow the previous market performance to see if you're jumping the gun or bailing out too early.
2) Leverage and cash management: Knowing when to use your margin to best advantage. It's easy to trace the times when you were over-leveraged at crucial opportunities and didn't have the cushion to make the most money. Your money model can be tested to see when you reach certain trigger points...and how your strategy worked.
3) Your trading psychology: This is sometimes the hardest pill to swallow. Back testing will show you your mental strengths and weaknesses. Do you let your emotions get out of hand? Are you too aggressive or too timid? Are you too easily influenced by what others think? As you back test, place a high priority on studying yourself, as well as your program.
When you back test your patterns, it's much easier to see areas of improvement that need to be undertaken. Without back testing, you're liable to develop a crisis of confidence in yourself and your system. When you start to lose confidence, you begin wholesale tinkering throughout your trading program. This is a bad mistake and will cause you to lose money. Back testing allows you to pinpoint areas of improvement, without throwing the baby out with the bathwater.
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